Ryanair is flying high

Let’s talk about the vibrant industry whose customers we all are on a regular basis: budget, or low-cost, no-frills airlines. Thanks to these operations, we Brits are amongst the most peripatetic people on the planet.

Two business models have emerged in the airline industry over the last 20 years. Firstly, there are airlines which specialise in long-haul – trans-continental – services which offer seats plus all the trimmings. These are often partially state-owned flag carriers (MAS) or privately held (Virgin Atlantic). Secondly, there are the short-haul budget airlines which offer mostly intra-continental no-frills flights at bargain (sometimes rock-bottom), prices.

Most of the recent growth in global air travel has been in the short-haul sector. This sector has found sufficient space for niche local players like Air Berlin, Norwegian Air, and Portugália in Europe and Air Asia in Asia. But, critically, these niche local players tend to operate from a single central hub.

There are only two budget players which truly have multi-hub route networks serving every country in the European Union between them and even a few African nations such as Morocco and Egypt.

They are Ryanair and EasyJet. Both have their primary hubs around London (EasyJet from Luton and Gatwick; Ryanair from Stansted), although Ryanair is unmistakably Irish. Moreover, both have secondary hubs in many other European cities. For example, EasyJet serves about 50 destinations out of Milan-Malpensa while Ryanair serves nearly 70 destinations out of Milan-Bergamo.

Early last year I thought that EasyJet was gaining ground against its arch-rival – but I underestimated Ryanair. The flying harp made a number of strategic adjustments to its business model and, in a remarkably short space of time, it roared ahead of its orange coloured rival. By the spring of this year Ryanair’s profits were well exceeding analysts’ expectations and the share price was soaring.

There have always been key differences between Ryanair and EasyJet in strategy and style. Both airlines were founded on the principle that they could strip out costs from the conventional airline model. But they set about this in different ways.

First, Ryanair pioneered low-cost air travel in the early days by cutting out airport fees. They did this by flying to second-tier provincial airports, some of which even paid them to fly there. EasyJet, in contrast, focused on major airports which normally have better transport links to the destination served.

That’s the main reason why tickets on EasyJet, overall, have been more expensive than those on Ryanair. Of course, savvy passengers add the cost of airport transfers at both ends of the journey.

A good example is that of Frankfurt-Hahn. Hahn airport is an ex-US air force base some 124 kilometres west of Frankfurt which will not suit you if you have meetings at the ECB in downtown Frankfurt; on the other hand it offers a perfect entry point to the beautiful Mosel Valley. Similarly, you wouldn’t you want to fly to Paris-Beauvais (85 kilometres north of Paris) if you have urgent business at the Elysée. Not everyone, though, heads straight to the city centre.

Over the last year Ryanair has begun to operate from key European hubs such as Rome-Fiumicino (from Brussels-Zaventem). And Ryanair flies to eleven destinations in Poland (including Warsaw Modlin) against EasyJet’s one, not to mention half a dozen domestic routes within Poland. Furthermore, Ryanair serves six destinations in Sweden as against EasyJet’s sole service to Stockholm Arlanda. Significantly, Ryanair flies from sixteen airports in the UK (including Derry/Londonderry in Northern Ireland) equalling EasyJet’s sixteen.

Second, most people were saying that EasyJet’s ticket pricing was more transparent than Ryanair’s. While the baseline ticket prices on Ryanair have always been cheap, by the time you had got through the purchase process, there were additional charges for luggage, using a credit card and – notoriously – even checking in.

Ryanair has tried to address this. You will still pay extra for baggage, for choosing a particular seat and for getting updates by SMS, but basically Ryanair’s charging structure is now in line with EasyJet’s. The supplement for paying by credit card (as opposed to debit card) is now 2% with both airlines.

Thirdly, EasyJet’s hand baggage policy was generally considered more user-friendly than Ryanair’s. EasyJet still guarantees that hand luggage of any weight may be taken on board so long as it does not exceed 50 x 40 x 20 centimetres in size. They also allow larger bags measuring up to 56 x 45 x 25 centimetres, though they reserve the right to request you to put them in the hold at no extra cost. Ryanair now allows one cabin bag weighing up to 10 kilograms with maximum dimensions of 55 x 40 x 20, plus one small bag up to 35 x 20 x 20 centimetres per passenger. Advantage, EasyJet, I’d say; but not by much[i].

Fourth, at the beginning of last year EasyJet was leagues ahead of Ryanair in the business travel market. Hedge fund managers were travelling to Geneva for lunch on EasyJet. EasyJet had achieved this by offering minimalist frills such as Speedy Boarding and allocated seating.

Ryanair got the message. They copied EasyJet’s move to allocated seating, in favour of the previous free-for-all; and then, in August last year, Ryanair launched Business Plus.

Business Plus passengers don’t get a separate cabin with complimentary champagne; but they are permitted to change their flight details at any time without supplement. Also, they can take a 20 kilogram checked-in bag and get a Premium Seat (at the front and back of the aircraft, near the exits – subject to availability). They get Priority Boarding, and are given a fast track passage through security at certain airports.

This was a conscious play to make inroads into the European business travel market and it has worked. Soon after the launch of Business Plus Ryanair announced that 25% of its customers were business travellers as against EasyJet’s 20%[ii].

Also in March last year, Ryanair reversed a long-standing policy to bar third-party agents from selling tickets for its flights, signing a Global Distribution System agreement with Travelport, the leading travel commerce platform.

Fifth, the word on the street was that EasyJet had a customer service-oriented business culture and Ryanair did not. In fact Ryanair had an amazing ability to put customers’ backs up, and it seemed to emanate from the top.

Well, Ryanair does seem to have made efforts to appear more customer-friendly. Last year they announced the roll-out of their Always Getting Better customer experience improvement programme. Ryanair’s chief marketing officer Kenny Jacobs[iii] said the aim of the programme was to become as liked as we are useful.

Sixth, the war of the websites was being won by EasyJet. According to the Daily Telegraph Travel, it took 20 clicks to book a Ryanair flight online but only 12 to book an EasyJet flight[iv]. Then, in March 2014, Ryanair revamped its website completely with great fanfare. The new Ryanair website was a huge aesthetic improvement and is now just as functional as EasyJet’s.

Seventh, last year it could be argued that since Stelios stepped down (and sold down), EasyJet had exhibited outstanding corporate governance. Ryanair, by contrast, was still run and controlled by Michael O’Leary, who has been CEO since 1994. Yet Stelios, still a major shareholder, has become increasingly confrontational towards the EasyJet board over the last year; while Michael might just be mellowing with age.

Ryanair is a massive operation, and it’s getting bigger. It operates more than 1,600 daily flights from 72 airports, connecting 189 destinations in 30 countries. It has a fleet of more than 300 new Boeing 737-800 aircraft. New aircraft acquisitions will enable Ryanair to grow traffic from 90 million passengers now to a target 150 million per year in 2024.

What’s the downside? A worsening economic picture in Europe would not necessarily be bad news. Ryanair’s management believes that a slowdown in the European economy could actually increase traffic as more people continue to move from traditional full-price operators to the budget sector. There is still the risk that Ryanair may have over-expanded during the recovery because of over-optimistic growth forecasts.

The Economist wrote an article, way back in the early 1990’s, entitled: Did you hear the one about the Irish multinational? It was about Irish packaging manufacturer, Jefferson Smurfit (now Smurfit Kappa). They’ll never use that header again. Ryanair has put Ireland on the corporate map.

In fact, Ryanair, love it or hate it (it has that Marmite quality) is one of the most extraordinary corporate success stories of modern times. Starting off in 1985 with one aircraft flying between Wexford and London, it is now the world’s largest airline by revenue, if not also by passengers and flights flown. This world-class Irish brand has revolutionised modern air travel and has been imitated widely (the sincerest form of flattery, as Oscar Wilde said). Michael O’Leary, despite his legendary lippy-ness, is a Harvard Business School case study in how to develop and apply a business strategy with unwavering determination.

On 07 April the airline announced that passenger numbers had topped 90 million for the first time. An early Easter boosted March passenger numbers to 6.67 million, pushing the rolling 12-month number to 90.5 million with a load factor of 90%. Michael O’Leary opined that his “decision to be nice” had helped sales.

Ryanair’s shares climbed 6% on 26 May when, celebrating its 30th birthday, it reported a 66% increase in after-tax profits, which rose to €867m for last year. The surge was driven by falling fuel costs and rising passenger numbers. Ryanair’s profit margin rose from 13% to an astonishing 18%. Seat utilisation rose from 83% to 88% with a target of 90%[v]. For now, Ryanair flies well above the clouds, unassailable.

There still is room for two big beasts in this space; but I foresee that Ryanair’s share price will continue to accelerate beyond that of its rival during 2015.

Ryanair is listed in both London (LON:RYA) and Dublin while its ADRs trade on the NASDAQ. Note that the LSE-listed stock is denominated in Euros, so any further depreciation of the Euro against Sterling would erode its value in Sterling terms. They hit an all-time high of just over €11.89 on 29 May and at time of writing are trading at €11.82. They have gained more than 50% over the last twelve months and though that is unlikely to be repeated they could have much further to go.